January 26 2011

Encumbrances: What does the future hold?

The Law Commission has recently made recommendations for a proposed new Land Transfer Act to replace the current Land Transfer Act 1952. The government hopes to introduce the Bill to the House next year. One significant change in the latest draft is the exclusion of provisions dealing with the registration of memoranda of encumbrances.

A memorandum of encumbrance is a charge registered over a property’s certificate of title which creates a security interest over that property in favour of a third party for the performance of an obligation. The most common memorandum of encumbrance is one that is registered to secure the payment of levies or membership of a group of property owners in a housing estate.

It is unclear at this stage whether memoranda of encumbrances have been forgotten or omitted deliberately. The New Zealand Law Society (NZLS) has said that these encumbrances should be retained in the new legislation as contained in their submission to Land Information New Zealand (LINZ).

In its submission, the NZLS used an example where individual owners in a development are required to join a residents’ or homeowners’ society or association and contribute funds, usually on an annual basis, to the maintenance and upkeep of the development. An encumbrance instrument is usually registered against each individual owner’s certificate of title to their property creating a charge over the property to secure the future payment of such levies generated by the society or association.

At the very least, should encumbrances be omitted from the new legislation, it is suggested by the NZLS that provisions should exist in the new legislation which deal with existing encumbrances, discharge of encumbrances and the ability to deal with parties who have entered into prior arrangements to create an encumbrance.

It is hoped that the Law Commission revisits the proposed new legislation in relation to the future of encumbrances. We believe, at the very least, that the legislation should provide, at a minimum, some workable provisions to deal with existing encumbrances and prior arrangements to create encumbrances so that owners in a development will have some comfort their interests are protected.